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How the Bonus Depreciation Phase-Out Affects 2023 Tax Planning

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TCJA and Bonus Depreciation

In 2017, the passage of the Tax Cuts and Jobs Act (TCJA) represented the largest tax overhaul in the United States in over 30 years.

The TCJA increased bonus depreciation from 50% to 100% for eligible assets placed in service from September 27, 2017, until January 1, 2023. Eligible assets for bonus depreciation include depreciable assets with a recovery period of 20 years or less, such as furniture, fixtures, leasehold improvements, and equipment. The full deduction for qualifying property ceased on December 31, 2022.

The bonus depreciation percentage will decrease by 20 percent each year for property placed in service after December 31, 2022, and before January 1, 2027. The bonus depreciation phase-out schedule is as follows:

How Can I Use Bonus Depreciation Before It Ends?

2023 fourth quarter tax planning should begin to focus on closing acquisitions or completion of new construction projects to place the assets into service before the end of 2023. Placing assets into service before December 31, 2023, will ensure clients are maximizing 80% bonus depreciation before it is reduced by 20%. 

One of the most straightforward approaches to utilizing bonus depreciation is to complete significant acquisitions before the year’s end. By doing this, you can put your new furniture, fixtures, and equipment into operation, thus qualifying it for this year’s bonus depreciation.

When setting up your yearly depreciation plan, be sure to mark assets as eligible for bonus depreciation if they’re less than 20 years old, brand new to your business, and not chosen for Section 179 deductions.

Even if your assets aren’t in use this year, think about buying them earlier. Bonus depreciation will decrease over the next 5 years, so buying ahead can lead to big tax savings.


Cost Segregation and Bonus Deprecation 

One of the most powerful real estate tax strategies on the market is cost segregation in conjunction with bonus deprecation.  A cost segregation study is a crucial tool for bonus depreciation, as it provides the necessary breakdown of property components. In addition, cost segregation offers substantial audit protection, fulfilling IRS requirements.

Maximize Tax Savings

  • A cost segregation study accelerates depreciation, leading to significant tax savings that free up capital for business growth and investments.

Improved Cash Flow

  • By reducing your tax burden, you can improve your business’s cash flow. This means more working capital, which can be used for expansion, upgrades, or other strategic investments.

Flexibility

  • Cost segregation can be applied to both existing and new properties, offering flexibility for businesses at various stages of growth.

CASE STUDY 

An outdoor image of multi-family residential rental properties.

Multi-Family Apartment Complex Example

  • Depreciable Basis: $37,445,200
  • Engineers Moved:
    • 18.5% of assets into 5-year personal property
    • 7% of assets into 15-year land improvements

Cost Segregation at various bonus depreciation rates

A chart graphic displaying the first-year tax savings of cost segregation utilization at various rates of bonus depreciation from 2018 through 2026.

Receive Expert Guidance on the Bonus Depreciation Phase-Out

In summary, a cost segregation study is not just an expense; it’s an investment that can lead to substantial tax savings, improved cash flow, and a stronger financial foundation for your business. It’s a smart financial strategy that can have a significant impact on your bottom line.
Given the full bonus depreciation phase-out by 2027, reach out to Isaac Downing, the Cost Segregation expert at Omega Accounting Solutions, to schedule a personalized consultation and determine whether a cost segregation study aligns with your needs.

 
 
 
About the Author

Isaac Downing, Senior Director of Tax Incentives

Tax industry expert, leading the expansion of Omega’s Credit & Incentives offerings, Downing has more than 15 years of experience in cost segregation, playing every role from conducting engineer-driven studies to driving business growth. Downing holds a BS in Accounting & Finance and with his extensive experience in public accounting and tax management, he has saved clients hundreds of millions of dollars in tax credits and incentives.